As plc housebuilders ABANDON ground rents, buyers should NOT buy any new leasehold flats with ground rents.
Five major housebuilders abolish ground rents on new flats
Five of the UK’s biggest housebuilders have scrapped ground rents on new flats, in a victory for future homeowners and campaigners who have long argued that the charges allow leaseholders to be exploited. Thousands of homeowners have been hit with inflated management fees and ground rents that rose by hundreds or even thousands of pounds a year on new-build flats and houses.
This is confirmed, although LKP appears to have pre-empted any sector-wide announcement by the housebuilders.
Barratt London, Countryside Properties plc, Bellway, and Taylor Wimpey have confirmed to the Independent that flats will be sold without ground rents. The influential Berkeley group, which builds prime Thames riverside flats, has not responded to LKP, but has notified buyers that new leases will have zero ground rents.
The move comes from developers as their reputation is shredded over the escalating cladding scandal, which may see a generation of first-time buyers wiped out owing to build defects that had nothing to do with them.
The Grenfell inquiry is also uncovering shocking evidence of failings in the housebuilding sector and government regulators, which may result in criminal charges.
Under these circumstances, a would-be purchaser of a £650,000 flat with ground rents of £550 at developer Strawberry Star’s Bronze site in Wandsworth, south west London, has contacted LKP for advice on whether to proceed.
Our advice is not to do so. No one should be buying new build properties with ground rents.
As plc housebuilders abandon ground rents, the entire future of leasehold sector is open to question.
The decision hugely increases the ability of government to reform the sector, pushing an open door to advance the case of commonhold property tenure for flats, which is the norm outside England and Wales – the only jurisdictions with widespread use of leasehold.
It also means that the Law Commission’s reports on reforming the leasehold sector can now be adopted without the sector defending the income streams of ground rents, which LKP has estimated to be worth annually £300 million – £5 million to housebuilders.
The government has been long committed to reforming leasehold by setting new ground rents at zero and banning the unnecessary wealth-eroding leasehold houses (which have largely been spurned by consumers).
LKP wishes no ill to Strawberry Star or its Bronze site, but it would be most unwise for anyone to purchase a new build property with ground rents when plc housebuilders are at last acknowledging that they were unjustifiable and have abandoned them.
The open question now is: what about the millions of leaseholders who were sold properties with ground rents (some as recently as last week)?
Related posts:
BBC R4 You and Yours now turns to Countryside’s doubling ground rents
Cracks in the leasehold racket as Barratt London drops ground rents
Bottomley to raise with Churchill Retirement its decision to continue charging ground rents
‘Peppercorn’ ground rents on Help To Buy properties … from next year
Government to ban leasehold houses and set ground rents ‘as low as’ zero
LKP calls for levy on developers and freeholders over cladding
And as the New Build Ground Rent Gravy Train hits the buffers this will impact the value and saleability of existing properties that still have ground rents?
This may bring those properties under the onerous contract scope?
By abandoning the previous ground rent and lease terms the developers have demonstrated that in truth other than a peppercorn there never was a need for such large ground rents on such short leases?
That should make it easier and cheaper for leaseholders to enfranchise or extend leaseholds so that they too are brought into line with new build leaseholders?
Hi Michael,
Although I agree with your view that existing leaseholders should find it easier and cheaper to enfranchise or extend leaseholds, but why..? you just said there was never a need for large ground rents, but in fact there was never a need for ground rents at all apart from exceptional cases, there was no need for onerous terms of any sort where the developer or builder just wanted to set up a scheme for extracting money without any service or responsibility.
So why should leaseholdes have to pay again!! for what should have beeen theirs in the first place!!
In most cases where the homeowner has been paying ground rent for some years, the freeholder has been given money to the freeholder for nothing…why..why.. should he pay for the privelidge of having what is justifiably his property and has nothing to do with a third party who’s sole purpose for including leasehold terms was to create an income stream.
I know you are on our side but it seems to me that British people have been indoctrinated to accept that they have to give due deference to organisations with company status as if they were sacred cows.
In my opinion the reverse should be the case, ie, any leaseholder who has paid ground rent for any time and where there was no reason to include lease terms should be given their money back and compensation!
I know a lot of people will reel back from this but don’t forget the people who set up these leasehold tenures are just people, they are not almighty and in most cases their operations have bordered and sometimes crossed the bounds of the very laws they purport to uphold.
As I am a member of the NLC I receive the Facebook messages and one person has summed it up…
“its like having to pay the mugger so he doesn’t take your shoes as well !!!”
Patrick.
in theory, the larger the ground rent the cheaper the purchase price (premium) of the lease.
Totally agree Patrick! What a shambles leasehold is. Everyone I tell about this can’t believe it! The whole thing is a stitch up by the developers and I’m looking forward to what the Competition and Markets Authority say about it as they must have seen thousands of unbelievable (but factual) stories from people up and down the country. They have the evidence and should be all over these developers!
Developers reputations:
I believe in fact architects and developers were clarifying with cladding manufacturers that their products were safe for insulation/cladding. Cladding manufacturers lied along with BRE faking tests results. It`s clear the testing was to provide non flammable results in the event of a fire, which is part of the building regulations on fire safety. In some instances construction was not overseen correctly by (NHBC or building control) and firebreaks not installed, which is an industry issue, not a cladding issue.
Cladding manufacturers deceit is another avenue to go down irrespective of developers.
PLC Builders are responsible on ground rents for extra revenue purposes and has relatively nothing to do with the cladding debacle.
Despite this news on GR, still NO govt legislation on GR or leasehold issues. Nothing but promises and pledges.
Read with interest your article on ground rents , but would be interested to know where we stand in the retirement sector we do seem to be paying excessive ground rents and service charges but no mention is ever made of our plight
This is all very well and it is about time, although I have ground rent of £1,500 per annum doubling every 20 years and wonder how that can be dealt with. If I try to sell my flat now, it’s going to be even more difficult than it was before. We need a campaign to bring existing leaseholders into line – favoured nations. But in any case the largest income stream for most freeholder/landlords isn’t ground rents. It’s the myriad ways they can dip into service charge or exploit the corruptions of the insurance market. Until we have commonhold, which I know you are fighting for, we will not be safe.
The UK is widely perceived throughout the world as a country subject to a stable legal system and therefore, a safe place to do business. Any legislation which in effect tears up contracts which have been freely entered by willing buyers and sellers who had professional representation prior to entering into them will put the UK in the same category of the many foreign countries that cannot be trusted to provide a stable environment in which to do business. It is even more important for the UK now as we agree our new trade deals across the world.
A buyer and theIr professional advisors assisting in the purchase of a new build flat in the last two years would have been very much aware of the ground rent provisions. The enormous amount of press comment would ensure that buyers and their advisors would be reminded that it is indeed for no service – a financial burden on the property that needs to be reflected in the offer made. The ground rent provisions being an integral part of the overall consideration the developer is seeking . It would be difficult to argue that the ground rent in a recent purchase should be capped or abolished
Hi Patrick,
I agree with you completely. All these class system tenures makes me very angry as I am Australian and never seem anything like it.
Leasehold is a made up tenture by some ancient lord or developer to make money and keep the masses down with long term leaserenting.
The Freeholder has already been paid centuries of unnecessary ground rents, ridiculous lease extensions and other fees.
Why why why do we have to pay for a lease extension to buy the flat again and again and then more money when the 80 years mark passes? Another human made up unfair unequal law.
In the meantime Freeholders are paying off the freehold purchase loan with lease extension money and buying up more freeholds and getting richer and ahead.
All whilst the poor leaseholders is left to pay more and more for nothing /no service/poor service and getting cash poor.
I very much hope all these cash outgoings will be compensated via the law commission report and enacted in law so commonhold is much cheaper or all these costs are substantially offset against the LHer freehold purchase.
We tried to buy the freehold in 2002 but the Commonhold Act did not allow it due to the tight unnecessary rules (eg. 50% and three quarter long term LH ). The commonhold act was a waste of time, energy and wasted money given to freeholders trapped in leasehold.
Leasehold was never required in the first place and has caused millions of LHERS misery so Government let’s get it right this time with COMMONHOLD and get the price right for leaseholders after centuries of giving our hard earned money freeholders. The crash of ground rents has now proven this.
Hi Patrick,
I agree with you completely. All these class system tenures makes me very angry as I am Australian and never seem anything like it.
Leasehold is a made up tenture by some ancient lord or developer to make money and keep the masses down with long term leaserenting.
The Freeholder has already been paid for centuries of unnecessary ground rents, ridiculous lease extensions and other fees.
Why why why do we have to pay for a lease extensions to buy the lease flat again and again and then more money when the 80 years mark passes? Another human made up unfair unequal law.
In the meantime Freeholders are paying off the freehold purchase loan with our lease extension money and buying up more freeholds and getting richer and ahead.
All whilst the poor leaseholders is left to pay more and more for nothing /no service/poor service and getting cash poor.
How can a lease possibly be a fair and equal contract?
I very much hope all these cash outgoings will be compensated via the law commission report and enacted in law so commonhold is much cheaper or all these costs are substantially offset against the LHer freehold purchase.
We tried to buy the freehold in 2002 but the Commonhold Act did not allow it due to the tight unnecessary rules (eg. 50% and three quarter long term LH ). The commonhold act was a waste of time, energy and wasted money given to freeholders by trapped leaseholders.
Leasehold was never required in the first place and has caused millions of LHERS misery so Government let’s get it right this time with COMMONHOLD and get the price right for leaseholders after centuries of giving our hard earned money to freeholders. The crash of ground rents has now proven this.
It seems many E & W buyers don’t understand how property developers are scamming the new property buyers.
In the Greater London area, some developers are charging £500K for new 2 bed leasehold flat where the lease requires the ground rent to start at £500 p.a ( = o.1% of the sale price ). The freehold title is sold separately to a ground rent investment company for around £12,500/ flat
This means the flat buyer is paying £500K to become ” long term rental tenant for 125 years ” and the freeholder is becomes owner of the building priced at £12,500 /flat . It means the flat buyers have contributed around 97.5 % of the total funding for the development and the ground rent investment company pays around 2.5% of total funding. to own the building after completion of the building.
If leaseholders pay annual ground rent , the freeholder owns the building. If there is no ground rent to pay , the leaseholders will own their building. Every MP representing E & W constituencies should know this fact.
Every MP in E& W ( approx 573 total ) should become member of the APPG for Leasehold Reform and show support to Sir Peter Bottomley The APPG has about 176 members which is shameful . Yes shameful.
Why are the other 400 MPs not standing with Sir Peter. ?
Yes , Sir Peter
Just ask the other 400 MPs in E &W to stand with you.
If the flat buyers have paid 97.5 % of the total development funding , the building belongs to the leaseholders , not to a company which has paid only paid 2.5% of the development funding.
Even the Law Commission and CMA must know this fact and they ( funded by tax payers money ) should be asked to give open support for the Leaseholders . I mean not to just dance around “the leasehold situation” and pretend the building belongs to the freehold company which paid only 2.5% of the development funding.
As ground rents and enfranchisement/lease extension costs disappear for new build flats, so will the investor class disappear in the new build sector? As for the pre-existing leaseholds, they will at present still hold on to their investments for now?
However, it will be a diminishing market.
They have already demolished the argument that leaseholds as currently constituted are necessary. They have demolished the argument that they are the custodians of buildings as well, and their disgraceful conduct over the cladding issues have not helped their cause either?
Given the likelihood that it will be easier for leaseholders to self manage that takes out the 40% insurance commissions and the earnings derived from connected managing agents, which will serve to make freehold investments a less attractive proposition?
The Law Commission report will lead to a much less complex process to enfranchise or extend the lease. A much simpler guide to valuations as happened in Scotland will be the result. Legal fees will in all probability be capped.
If we add the prospect of future inflation that will have a huge impact on reversionary values, so freeholders may well be tempted to get out while they can?. And the sting in the tail for investors is that they have largely borrowed money to purchase the freeholds? The lenders will want their money back?
There is a growing feeling that the risk free rate used in valuing the reversion and capitalizing income needs to reflect the complete collapse in interest rates since it was last reviewed in the seminal case of Sportelli
The risk free rate in 2007 was thought to be 2.25% to 2.5% today the risk free rate (the Ogden Rate) is around minus 0.25%
A reduction of say 1.5% in both the revisionary/deferment rate and the capitalization rate would result in very substantial increases in the premiums for a lease extension
The Great Estates in London who hold substantial sums in revisionary ground rents and insurance companies holding large swaths of ground rent income much of which is indexed have indicated that they will be looking to run a test case challenging the current rates.
Based on yields for indexed linked gilts the market is not expecting inflation in the short to medium term
Dear Stephen,
It seems you are on the side of ground rent speculators/investors, you say (Dec 10th) that..
‘Any legislation which in effect tears up contracts which have been freely entered by willing buyers and sellers who had professional representation prior to entering into them…etc’ …
Well Stephen if you are talking about the sale of a propery to a prospective leaseholder, the fact is that many of these contracts were completed using obsfucated legal lingo and the solicitor mandated by the Developer or management company doing the sale, so there are not many who ‘freely entered into these unfair contracts, and you yourself say that is the case as you point out ‘it is for no service ..and a burden’ was this pointed out in the sale?
Stephen, as for your comment of Dec 11th, I for one can’t understand what you are talking about! … you are obviously a person well versed in Buisness City language, and as far as I am concerned it tells me that you are trying to bamboozle ordinary folk into thinking that the British system of leaseholding and its injustices should carry on as normal or suffer the consequences of shareholders losing money… Frankly my friend I DON’T GIVE A DAMN !!!
My advice to whoever wants to keep this vile leaseholding system going is to shove your bits of legal paper where the sun don’t shine…!!
Your phrase “My advice to whoever wants to keep this vile leaseholding system going is to shove your bits of legal paper where the sun don’t shine…!!” and the ability to use such language is made possible by the anonymity given by the internet. It would suggest that the points I have made ( which I shall admit are points I have heard and developed from others in constructive and professional debate) make it difficult for you to argue against. So instead of developing your argument and seeking to put forward refinements and suggestions you descend into vulgarity. If you are intellectually inquisitive and engage in constructive debate, then the quality and the delivery of your argument should improve.
There are indeed cases where purchasers have been directed to solicitors who have not acted in the interest of lessees but rather in the interests of the developer. Therefore, regardless of the number of years that have passed, they should be able to seek legal redress and possibly there may be a criminal action. Your assertion that the contract was “completed using obfuscated legal lingo” is groundless.
But where that is not the case, and the lessee has used their own solicitor then if the lease spells out clearly the initial ground rent and the review pattern it would undermine the faith we place in the legal system if a contract entered into with professional advisors acting for both sides should be interfered with because it was felt in hindsight to be of no real value to one side.
A solicitor should be able to interpret legal clauses and that is why they charge an hourly rate far higher than so many other trades and professions. But the view of many lobbying groups acting for lessees is that a ground rent of say £350 a year rising by say the RPI every 10 years on a property worth at the time of sale £275,000 is considered so onerous to the point that it is unmortgageable. A calm reflection on the matter should conclude there is no problem, and the worst that could be said of the deal is that it may impinge on the value of the flat by around a couple of thousand pounds. Yet this is considered such a serious issue that the lobbying groups wish the government to put on a suit of armour and charge to Brussels to fight for the lessees in the face of such outrageous terms so that the ground rent is capped at £250 per annum. The root of the problem here is that many mortgagees in the face of 10 years doublers have introduced limits on ground rents which are now having an adverse effect on lending which in turn effects values. This problem could be lifted if a mortgagee was given rights to lower or extinguish the ground rent at any time, adding the cost of such a reduction on to the borrower . As the reversion would not be valued then the exercise with the use of prescribed variables would be very straight forward and easy to achieve if a standard deed of variation was prescribed.
It must not be overlooked that the increase in the cost of enfranchisement and lease extensions is driven by the collapse in interest rates over the last decade. This collapse in interest rates, of course, has also resulted in an increase in property prices and an increase in the value of pension rights which should I suspect in almost all cases outweigh the additional cost of enfranchisement/lease extension
Does this mean that leaseholders of any apartment with a freehold and an annual ground rent charge can look forward the annual ground rent charge being scrapped in the very near future?